'In absorption costing, all manufacturing costs, both fixed and variable, are assigned to product cost. This...

    

 

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'In absorption costing, all manufacturing costs, both fixed and variable, are assigned to product cost. This is contrasted with variable costing, in which fixed manufacturing costs are not absorbed by the product. Advocates promote absorption costing because fixed manufacturing costs provide future benefits. However, absorption costing can encourage managers to engage in behaviour that is harmful to the organisation'. Required: Question 2.1 Discuss the above statement explaining: (a) Key features of both methods. (b) Why and when absorption costing method is used. (c) How absorption costing encourages managers to engage in behaviour that is harmful to the organisation [Word limit: 400 words. Show the word count at the end of your answer] (10 marks) Your Answer (expand the space as required): Word count= Part B The Phoenix Publishing Company has three Service departments and two operating departments. Selected data from a recent period on the five departments follow: Costs Number employees of Total hours Square feet Space Occupied Direct labour hours Machine Hours labour Service Departments Administration $358,000 30 0 7500 Custodial Personnel Maintenance $78,000 $35,000 $54,000 Printing Department Binding Department 10 12 5,000 8,000 3500 5000 60 Operating Departments 200 40 240 Binding Printing Total $488,000 $221,000 $1,234,000 362 100 30,000 45,000 105,000 15000 25,000 20,000 100,000 110,000 10,000 95,000 150 Binding and Printing are operating departments; the other departments are service departments. The costs of Factory Administration is allocated first based on labour-hours followed by Custodial Services based on square feet occupied; Personnel based on number of employees; and Maintenance based on machine-hours. The company is considering to bid a job that requires machine and labour time as follows: Machine-Hours Labour-hours 20 130 150 193,000 151,000 120,000 120,000 The company is considering three different approaches to calculate predetermined overhead rates for the job: 4 a. Allocate the Service department costs to the operating departments using the Direct method. Then compute predetermined overhead rates in the operating departments, using a machine-hours basis in printing and a direct labour-hours basis in Binding Department. b. Allocate the Service department costs to the operating departments using the Step-down Method. Then compute predetermined overhead rates in the operating departments, using a machine-hours basis in printing and a direct labour-hours basis in Binding Department. c. The company doesn't bother with allocating service department costs but simply computes a single plant wide overhead rate based on total overhead costs divided by the total direct labour-hours. H Required: Question 2.2 Calculate (i) the predetermined overhead rates under three different approaches. Show detail workings to support your calculations. Then (ii) compute the amount of overhead cost that would be assigned to the job if the overhead rates were developed using the direct method, step-down method and the plant wide method. (8 marks) Your Answer (add extra rows/columns to the template if required): 4 2 P 2 2 4 Direct Methode P 2 P 2 Step-down Methode 2 2 Plantwide Methode 2 2 2 ↑↑. t. t. Show your workings here (expand the space as required): ttt + 4 4 4 4 4 2 Question 2.3 Write a report to the management explaining which method would be more appropriate for the company to use for bidding the job. (4 marks) [Word limit: 150 words. Show the word count at the end of your answer] Your Answer (expand the space as required): 2 2 4 4 3 44 t Word count= 16: 'In absorption costing, all manufacturing costs, both fixed and variable, are assigned to product cost. This is contrasted with variable costing, in which fixed manufacturing costs are not absorbed by the product. Advocates promote absorption costing because fixed manufacturing costs provide future benefits. However, absorption costing can encourage managers to engage in behaviour that is harmful to the organisation'. Required: Question 2.1 Discuss the above statement explaining: (a) Key features of both methods. (b) Why and when absorption costing method is used. (c) How absorption costing encourages managers to engage in behaviour that is harmful to the organisation [Word limit: 400 words. Show the word count at the end of your answer] (10 marks) Your Answer (expand the space as required): Word count= Part B The Phoenix Publishing Company has three Service departments and two operating departments. Selected data from a recent period on the five departments follow: Costs Number employees of Total hours Square feet Space Occupied Direct labour hours Machine Hours labour Service Departments Administration $358,000 30 0 7500 Custodial Personnel Maintenance $78,000 $35,000 $54,000 Printing Department Binding Department 10 12 5,000 8,000 3500 5000 60 Operating Departments 200 40 240 Binding Printing Total $488,000 $221,000 $1,234,000 362 100 30,000 45,000 105,000 15000 25,000 20,000 100,000 110,000 10,000 95,000 150 Binding and Printing are operating departments; the other departments are service departments. The costs of Factory Administration is allocated first based on labour-hours followed by Custodial Services based on square feet occupied; Personnel based on number of employees; and Maintenance based on machine-hours. The company is considering to bid a job that requires machine and labour time as follows: Machine-Hours Labour-hours 20 130 150 193,000 151,000 120,000 120,000 The company is considering three different approaches to calculate predetermined overhead rates for the job: 4 a. Allocate the Service department costs to the operating departments using the Direct method. Then compute predetermined overhead rates in the operating departments, using a machine-hours basis in printing and a direct labour-hours basis in Binding Department. b. Allocate the Service department costs to the operating departments using the Step-down Method. Then compute predetermined overhead rates in the operating departments, using a machine-hours basis in printing and a direct labour-hours basis in Binding Department. c. The company doesn't bother with allocating service department costs but simply computes a single plant wide overhead rate based on total overhead costs divided by the total direct labour-hours. H Required: Question 2.2 Calculate (i) the predetermined overhead rates under three different approaches. Show detail workings to support your calculations. Then (ii) compute the amount of overhead cost that would be assigned to the job if the overhead rates were developed using the direct method, step-down method and the plant wide method. (8 marks) Your Answer (add extra rows/columns to the template if required): 4 2 P 2 2 4 Direct Methode P 2 P 2 Step-down Methode 2 2 Plantwide Methode 2 2 2 ↑↑. t. t. Show your workings here (expand the space as required): ttt + 4 4 4 4 4 2 Question 2.3 Write a report to the management explaining which method would be more appropriate for the company to use for bidding the job. (4 marks) [Word limit: 150 words. Show the word count at the end of your answer] Your Answer (expand the space as required): 2 2 4 4 3 44 t Word count= 16:

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a Key features of both methods Absorption Costing 1 In absorption costing product cost is based on all manufacturing costsdirect material direct labou... View the full answer